The cost of living in GCC countries has increased over time. The region, which is home to nearly 51.6 million people, had an estimated GDP per capita of $42,000 in 2014. While the region’s population increased at a CAGR of 5% during 2004–14, per capita GDP increased at a CAGR of 5.9% during the period. In the years following the global economic crisis, GCC countries recorded an increase in the relative cost of living, attributable to their continued growth. The hydrocarbon boom, diversification of the economy, surge in the real estate sector, and political stability helped create an environment conducive for an ideal quality of life in the region.
Indicators such as housing, education, healthcare, food and households, and salaries, which reflect the cost of living, have been rising in GCC countries. However, there is a high degree of disparity in the GCC in terms of cost of living metrics. According to the Cost of Living GCC Report, Qatar was the most expensive country in 2014, followed by the UAE, Saudi Arabia, Bahrain, Oman and Kuwait in 2014.
A tight rental market has made Qatar the most expensive GCC country. In 2014, the annual rent for a two-bedroom apartment was the highest in the country ($44,675, Dh164,091), followed by the UAE ($31,536); this was about five times the rent in Saudi Arabia and Bahrain. In addition, the utility cost, which includes the cost of power, water, and sewerage, for an average three-bedroom apartment was the highest in the UAE at $270 per bill, followed by Oman ($160), Bahrain ($136), Qatar ($135) and Kuwait ($83). Saudi Arabia was the cheapest country for utilities at $55.
The cost of 11 typical food items across the GCC, including milk, bread, rice, eggs, and vegetable was the highest in Qatar at $36, closely followed by the UAE and Oman ($34 each); Saudi Arabia was the cheapest at $23. In terms of healthcare costs, the UAE has been outperforming its peers; for instance, a mid-level general practitioner charges a consultation fee of $80 per visit in the UAE, while this fee would be as low as $13 in Oman. Furthermore, a dental checkup could cost $110 in the UAE, nearly four times the charge in Oman.
In line with the trends mentioned above, the income levels in GCC countries are on the rise. The basic annual salary of a white collar employee with more than seven years of experience is expected to be about $160,000, $157,000 and $110,000 in Qatar, the UAE and Saudi Arabia, respectively. Considering the high living cost, particular in Qatar and the UAE, employers across the GCC are introducing new measures and focusing on employee allowances and benefits while allocating their budgets; for instance, while the average housing allowance is approximately 25% of the basic pay across the GCC, it is about 35–40% in the UAE and Qatar.
While a rising cost of living is detrimental to consumers, inflation can turn out to be profitable if invested rightly. A high cost of living requires consumers to invest judiciously in order to maintain their purchasing power. Inflation results in currency depreciation; this underlines the need for investing capital in assets and other investments. An investor can choose from a range of assets for investment during inflation. In an ideal scenario, the key to making money in an inflationary environment is to hold investments that grow in value at a rate in excess of the rate of inflation. Investments such as real estate, gold, oil, stocks, and inflation-indexed bonds are historically viewed as good hedges against inflation.
In order to understand the constitution of successful investment portfolio during an inflationary environment, let us evaluate the performance of various asset classes during 2010–14. The various asset classes under consideration are stocks, gold, emerging market REITs, bank deposits, and money market funds (MMFs). If an investor invested $100 across each of these asset classes at the beginning of 2010 and given that the CPI of the GCC increased from 163.9 to 179.8 (a total of 9.7% and 2.3% compounded annually) during this period, the investor would require his assets to produce returns that are aligned with the CPI growth in the region in order to maintain his purchasing power. At the end of 2014, the investor would have generated approximately 48% and 40% (10.3% and 8.8% per annum) in returns from investments in emerging market REITs and equities, respectively. Bank deposits and MMFs generated an average 4% yield during the same period (less than 1% compounded per annum).
There are multiple channels for investments, and there are various pros and cons associated with every type of investment hedge, as in the case of any investment. The deemed winners in times of an inflationary environment might be trailing in the dust during deflation. Hence, to create a successful portfolio, an investor should exploit unique economic conditions prevailing at the given point in time.
The writer is Founder and CEO, Al Masah Capital Management Limited